Austerity Won’t Restore our Prosperity

In case you haven’t heard, the economy is not in great shape. We’ve got 10 percent unemployment, home foreclosures are soaring, and the national debt is exploding. The future looks even worse. Some people think inflation is on the way; others think it’s going to be deflation, a condition in which your money is worth a little more, but you have a lot less of it.

The good news is that some things are a lot better than when Barack Obama took office. The stock market’s up, our financial system has been saved from disaster, and our auto industry is back from the brink of extinction.

But it’s still not good enough, not even near. And there are signs that the anemic recovery from the Great Recession might already be spent.

President Obama’s response from the beginning has been based on classic Keynesian economic theory: When you’re in an economic recession, you use government programs to put money into the hands of people, necessarily spending more than you take in.

This drives conservatives crazy. They think the thing to do is lower taxes and cut government spending. They point to the fact that President Franklin D. Roosevelt’s New Deal spending didn’t pull the country out of the Depression during the 1930s.

Keynesians are quick to argue that the reason the New Deal wasn’t as effective as it could have been was that it was too small. When World War II came along and government spending really exploded, the Depression was blown away.

I’m Keynes guy. The Bush years were the Golden Age of tax cuts. If they were such a great idea, why did the economy go south?

Yet the example of Germany gives one pause.

Germany, beset with economic problems similar to the U.S., took the conservative approach. It restrained government spending, discouraged consumer borrowing, controlled wages, and balked at bailing out its neighbors in Europe–all things that John Maynard Keynes would have thought acts of folly.

But the latest quarterly results showed Germany’s economy growing at an annual rate of nearly 9 percent, a figure that dwarfs those of its western competitors.

Conservatives are now gloating. We told you so, they’re saying. Austerity works.

And they may be right in this particular case, but I would point out that there are important differences between Germany and the United States. In the first place, the Germans have a social safety net in place that would have our conservatives yelling “socialism” from the rooftops. That makes an austerity program a little easier to sell. (Sorry to be the one to break the news, but they’ve got socialized medicine too.)

In the second place, their prosperity is based on producing things and exporting them, rather than buying and importing, as ours is.

To make that possible they’ve maintained a strong industrial base. They pride themselves on an educational system that trains workers to run their factories.

We have let our industrial base crumble into dust and blow away. And we are now No. 23 among the world’s most developed countries in the percentage of our high school students who graduate, and we’re leading the pack in high school dropouts.

In other words, it’s just not a matter of government policy. Germany is dealing from a strong hand, even in hard times. We are trying to prop up an economy that is a giant Ponzi scheme.

I don’t know if Obama has the answer to our problems, but I’m pretty sure that the Republican “Don’t just do something; stand there!” philosophy doesn’t work.